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Audit raises red flags in Bank Mutiara's latest bailout, account
Unhappy birthday to you: Outgoing Supreme Audit Agency (BPK) chief Hadi Poernomo addresses his well-wishers at his farewell party, which coincided with his 67th birthday, at his office in Jakarta on Monday
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span class="inline inline-center">Unhappy birthday to you: Outgoing Supreme Audit Agency (BPK) chief Hadi Poernomo addresses his well-wishers at his farewell party, which coincided with his 67th birthday, at his office in Jakarta on Monday. On the same day, the Corruption Eradication Commission (KPK) named him a suspect on the allegation that he granted bank BCA a tax objection worth Rp 5.7 trillion when he served as taxation director-general during 2001-2006. Antara/Puspa Perwitasari
The Supreme Audit Agency (BPK) has indicated foul play in the recent bailout of Bank Mutiara following signs of account manipulation and the failure to uphold the principle of prudent banking.
The Deposit Insurance Corporation (LPS) was forced to inject Rp 1.25 trillion (US$109 million) in additional capital into the bank on Dec. 23 to meet Bank Indonesia's (BI) minimum capital requirements due to a sudden surge in the bank's bad loans.
The LPS holds a 99.9 percent stake in the bank, previously named Bank Century, after it injected a whopping Rp 6.7 trillion into it in 2008 due to misappropriations that could have led to the bank becoming insolvent and potentially causing systemic problems in the banking sector.
In an audit report of the bailout submitted to the House of Representatives on April 18, the BPK concluded that the financial injection had not only violated existing regulations but also could not be justified, given the irregularities in the bank's books.
Among them are the bank's failure to report the real condition of its health to BI between June and November 2013.
According to the audit, the bank reported to BI on July 29 that its capital adequacy ratio (CAR) declined to minus 3.16 percent as of the account on June 30. The bank's management later told BI on July 31 that the CAR was 11 percent, only to be revised to minus 0.55 percent on Aug. 5.
BI has required banks have a minimum of 8 percent CAR ' an indicator used to measure a bank's health.
'There is an indication that the bank may have cooked its books to hide its real condition,' said outgoing BPK chairman Hadi Poernomo six hours before the Corruption Eradication Commission (KPK) named him a suspect in an unrelated case of alleged tax fraud when serving as director general of taxation between 2001 and 2006.
According to the BPK audit, Bank Mutiara's management did not correct the accounting irregularities until between January and March 2014, three months after the bailout.
The BPK also questioned the way the LPS and the bank's management handled the bad loans that undermined the sustainability of the bank since the 2008 bailout.
'There is an indication of attempts to cover up the toxic assets. We believe there should be a thorough investigation to reveal the magnitude of such assets,' said Hadi.
The audit has also highlighted a failure by the bank to comply with banking regulations in the process of restructuring its assets and loan channeling as well as in categorizing the severity of its bad loans.
Mutiara's health deteriorated after four of its big debtors could no longer pay their dues for the second half of last year, according to the bank's officials.
LPS executive chairman Kartika Wirjoatmodjo, who assumed the top job in January, admitted the mounting problems in Mutiara but denied allegations that the LPS was trying to cover them up.
'There were shortcomings in the LPS during its early days, but we have to keep the sustainability of the bank,' he said.
Kartika said there was an initial calculation in which the bailout for Bank Mutiara could top Rp 8 trillion, but it was lowered to Rp 6.7 trillion in the hope the bank could restructure its assets and bad loans to get back on its feet.
'There are some successes in the restructuring and some failures. It is just too bad that the ongoing restructuring is not sustainable and has forced the bank to request additional capital,' he said.
He also voiced optimism that the BPK audit would not scare away potential investors from bidding for the bank because the bank's CAR was already at 14 percent and its balance sheet was healthy.
The LPS is set to auction off Mutiara this year even though the proceeds of the sale are unlikely to recoup the losses entailed in the bailout.
At least three of the seven investors are foreign banks based in China, Japan and Malaysia, and the rest are private companies.
In response to the BPK's audit, BI spokesman Tirta Segara said BI had carried out its supervisory function accordingly.
'As regulator and supervisor, BI demanded at the time [in December] the bank's shareholders raise additional capital,' he said.
BI has transferred its banking supervisory and regulatory function to the Financial Services Authority (OJK) early this year.
The 2008 Bank Century bailout, which was done according to an instruction from BI and the Finance Ministry, has created a firestorm of political controversy that has dogged the administration of President Susilo Bambang Yudhoyono.
